Shares in suspended infant formula producer Bellamy's Australia Ltd (ASX: BAL) returned to the market today. And most likely to the chagrin of existing investors as shares are down 35% to $4.30 at the time of writing.
Today's announcement tackled a raft of issues, and there's too much to cover in one brief article – the company update should be considered required reading for all Bellamy's shareholders.
Here are the most important facts:
- Full-year 2017 revenues expected to be between $220 million and $240 million
- Profit after tax margins are expected to be between 6% and 9% in the first half, and between 4% and 6% in the second half of 2017, down from 15.6% in 2016
- Earnings Before Interest and Tax (EBIT) margins, another measure of profitability, expected to be between 10% and 12%, down from 22.2% in 2016
- Supply chain restructure. In extending the length of contract with FONTERRA UNIT NZX (ASX: FSF) by 3 years and spreading minimum agreed volumes over this period in order to minimise shortfall payments to supplier Fonterra
- Every executive position is being reassessed
- CEO Laura McBain ceases to be CEO immediately, but will remain with the company until March 2017 to assist with 'outstanding matters'
- Chief Financial Officer (CFO) Shona Ollington is demoted to part of the finance team, with Nigel Underwood being appointed to CFO position
- Dimitri Kiriacoulacos appointed as legal counsel and additional company secretary
- Contrary to media suggestions, no class actions have been served on the company yet, Bellamy's will inform if/when that happens
Now What?
There are several further items of concern, such as the fact that Bellamy's has just $1 million net cash at 31 December 2016, with banking facilities (debt) covering the company's working capital requirements. Dividends were not mentioned but I think it is unlikely that there will be a dividend paid in February.
There is also a potential change to the company's structure of creditors, with Fonterra possibly being granted additional privileges as well as gaining rights to terminate its contract with Bellamy's in the event of a change of control.
Higher costs of organic ingredients have also contributed to weaker margins, and Bellamy's is now burdened with just over $100 million in inventory. One small plus is that the shelf life of infant formula is 2-3 years, which avoids the necessity of writing down and disposing of inventory (and paying to replace it), at least in the next few months. Longer term, this could still become necessary if Bellamy's is unable to shift its old inventory.
The announcement itself was pretty brusque, and lacked a statement from CEO Laura McBain who has been with the company for 10 years. Surprisingly, Ms McBain was the individual who got the axe today, despite some agitators for board change preferring that she stay.
What 2017 should look like
Overall – assuming company forecasts are accurate – investors are facing up to a 10% decline in revenue for full-year 2017, plus an estimated 60% decline in profits.
Here are some ballpark calculations for Bellamy's forecast 2017 profits, assuming revenue comes in at the minimum amounts forecast by the company.
Assumptions:
- First half revenue of $115 million with profit after tax margins between 6% and 9%
- Second half revenue of $105 million ($220 million total) with profit after tax margins between 4% and 6%
First half profit could be between $6.9 million and $10.35 million, and second half profits between $4.2 million and $6.3 million.
Based on the company's minimum revenue forecasts, full-year profits should come in between $11.1 million and $16.65 million. This represents a decline of between 71% and 57% compared to 2016, which saw Bellamy's report a $38.3 million net profit after tax.
With the company's current market capitalisation of $445 million according to Google Finance, Bellamy's is priced at between 27 and 40 times its forecast full-year earnings for 2017 – based on the company's minimum forecast revenues of $220 million.
This figure could potentially vary significantly depending on how accurate management's forecasts are – and it doesn't include the potential for impairments, class actions, or other issues that may arise. Today hasn't been a sterling day for Bellamy's shareholders, although shares in competing business a2 Milk Company Ltd (Australia) (ASX: A2M) rose 3% on the news.
